Trey Lockerbie (03:13):
Okay. I’m glad to hear that because I was certainly scary there for a minute there and a lot of people were affected. Since you and I last spoke, which is back now in January 2021, it was Episode 334, ark has become quite polarizing and it garnered a considerable amount of skepticism, especially as the macro environment has shifted into a higher inflation, higher interest rate world. How is Cathie Wood adapting to the new environment and how is Ark and its companies?
Cathie Wood (03:43):
Well, I think this is when we’re at our best, when we’re under pressure. When we were talking in January of ’21, we could do no wrong, I think you’ll remember, Trey, and I knew that was wrong. That’s just not the real world. Believe it or not, for however difficult the performance has been for the past 18 months and it certainly has been difficult. I think our team has never been closer. We moved into action what I called fighting the ground war because there was so much fear, uncertainty and doubt, FUD around our strategy. And it seems to me that what has happened in the last year and a half is we own this space. We own this space for better or worse, I think it’s for better. The skeptics think for worse, I would not bet against American ingenuity and innovation, but that seems to be where the market is gone and the excuse has been, and there is some truth to why one would veer away from our strategies.
Cathie Wood (04:47):
If interest rates are going to continue moving up, then the present value of future cash flows will be moving down. We understand that. We believe the inflation and interest rate narrative is way overblown now. It got much further than we expected, to be sure. We did not expect supply chain issues to last for more than two years. We did not expect Russia to invade Ukraine. But I would put both of those into the shock category that happened because of COVID, the supply chain, for sure.
Cathie Wood (05:23):
And I don’t think when history is written, I do not believe that the inflation we’re seeing now will be embedded in the system and yet Chairman Powell is using the same sledgehammer that Chairman Volcker did in the early 80s. Chairman Volcker was fighting 15 years’ worth of inflation. Chairman Powell is fighting, when he started, 15 months using the same sledgehammer, and I think it’s a big mistake and we’ll find out how it’s a mistake. The first clue is the liability-driven investment schemes in the UK experiencing a Lehman moment in the last few weeks. And I think we’re going to see some of the same here. We’ve been wondering why credit default swaps on the strongest money center banks in the United States like JP Morgan and Bank of America, they’ve been moving up toward COVID highs. So there’s something out there.
Trey Lockerbie (06:22):
Yeah, another storm is brewing. I mean, a lot of skepticism around, or a lot of speculation I should say around Credit Suisse in particular. As you mentioned, what’s your takeaway on those CDS gaps and price, and do you think it’s related to just simply the real estate market dropping off precipitously from the interest rates going up?
Cathie Wood (06:40):
Well, I do think real estate is in a bit of shock, and I do believe the Fed’s policies are deflationary. We see the deflation in the pipeline in commodity prices, many of them down 30% to 80%. If you look at the BDIY, the Baltic Freight Index is down 75%, 80%. That means supply chain problems are no problem now or very little of the problem. We think you never know where the crisis is going to occur, but when we heard about the swaps-based crisis in the UK, you could see it in the swaps market. It was seizing up and the collateral calls the pension funds were not going to make them and therefore the banks would be yet again in trouble and the Bank of England had to resolve that problem. We’re looking here in the United States and the swaps market is also acting very strangely, and I don’t pretend to be an expert here, I’m just looking at the charts of markets that seem somewhat esoteric to those of us on the equity side and they’re in a bit of turmoil.
Cathie Wood (07:49):
So there could be some liability-driven investment dislocations. Again, why is this? It is because unlike in the early 80s when Volcker raised interest rates twofold from 10% to 20%, that’s the Fed funds rate, and an environment where people were used to inflation and were used to interest rates going up to catch inflation. Unlike that, this time around within six months, we’ve had a 13-fold increase in interest rates from 0.25% to 3.25%. And the way that argument is dismissed is, oh, well, we are starting from such a low base. That is the point. We’re starting from such a low base. It is a massive shock to the system after 10 to 12 years post ’08, and ’09 of extremely low-interest rates. And so, I think we’re going to see some fallout and I do believe the Fed will pivot because of it.
Trey Lockerbie (08:48):
So I want to get into that as well. But sticking with the Ark performance, I am curious about the AUM of Ark because it exploded in a very short amount of time. Did that have an impact on the strategies, and did you have to shift strategies at all to accommodate the amount of capital?
Cathie Wood (09:06):
It’s very interesting. Last year, we had net inflows of $17 billion, gross inflows of $21 billion, which meant we retained a lot of those assets. Now, what’s beautiful about the ETF construct, the ETF wrapper is as a portfolio manager, I don’t have to worry about flows. We have an entire ecosystem around us, market makers, authorized participants who are managing the flows and they’re doing it algorithmically. They’re doing it with lots of tools of the trade. They’ve got access to securities lending and all kinds of derivatives. So, we have barely seen a badge in our spreads, which would indicate difficulty in deploying funds. They’ve been very tight. And one of the reasons is, and this is the wonderful thing about having so much controversy around our funds, we’ve got a lot of investor shorting, our underlying stocks, our ETFs, and we’ve got others buying. So there’s a lot of volumes and that’s been excellent for us for our strategy. We could accommodate a lot more even than that $21 billion in such a short period last year.
Trey Lockerbie (10:24):
Is this like Bezos likes to talk about when Amazon went down around 92%, I believe, in the dot-com bubble, but the fundamentals were strong. Are you seeing the new environment having an impact on the fundamentals of some of the innovative companies that you’ve just mentioned might be being short by a lot of people?
Cathie Wood (10:40):
Well, you never say no impact, but the way we’ve approached innovation that the platforms that are riding down the learning curve, cost curve declines that are cutting across economic sectors so that they can go mass market and that are launching pads for more innovation. Innovation solves problems. And we have so many problems now. We believe what happened during right before COVID and then during COVID was a warmup for the next few years in our strategy. And I’ll describe what I mean by that. In the space of just one month, as we were recognizing what a disaster the coronavirus crisis was, our flagship fund went down 46%. The market was maybe down 25%, 46% and many of our genomic stocks went through a near-death experience because they had small cash cushions, and they were in a cash burn situation.
Cathie Wood (11:37):
And we were saying back then, wait a minute, this makes no sense. How are we going to solve this crisis? It’s a coronavirus crisis. It’s the genomic revolution’s going to solve it. And of course, from the low during COVID to February of ’21, we were up 360% and that was less than a year, 360% led by the genomics names. And during that time, they did a lot of secondaries because of that near-death experience. Since then, since that peak at our low in May, which was May, that’s also very important. All the other major indices have gone to lower lows. We have not. I don’t want to tempt fate, but we have not. And so, that 75%, we bottomed in May, and we believe now that we have so many more problems, the supply chain issues were introduced bottleneck throughout the world. We’ve got China as a problem, we’ve got Europe with its energy prices as a problem, and we have the invasion of Ukraine as another problem to solve. Innovation solves problems better, cheaper, faster, more productive, more creative solutions to problems, and it usually gains traction during tough times.
Cathie Wood (12:54):
Now, the reason there’s been a lot of confusion as it relates to our strategy, one, inflation, sure. You kept from a macro point of view, but we believe inflation peaked in February. If you look at the PCE deflator core and you look at the pipeline of commodity prices, just swift declines. And then as important, maybe more important, the massive inventory overhang that retailers are facing. Nike reported sales up 3%, inventory is up 44% and in North America, inventory is up 68% and in transit from probably China, inventory is up 85%. I mean, we’re being overwhelmed here. So, that’s going to end up in price discounting, so that inflation argument is we believe going to go away. The other problem we faced in this difficult period was this mantra that we were nothing but a stay at home strategy. We needed a crisis like COVID in order to shine and partly because interest rates and inflation came down. Nonetheless, during this last year and a half, two year period, the comparisons against the booms that we saw during COVID have been difficult.
Cathie Wood (14:09):
Zoom’s toughest comparison I think it was in the first quarter and it was against 390% revenue growth the previous year. Zoom’s revenue is still growing. The fact that it’s still growing says it all. There’s something going on here. There’s a massive shift of enterprise communications from on-prem and hardware-oriented into the cloud software-oriented. So I think the fear, uncertainty, and doubt around the tough comparison issue has also given hedge funds and others reason to trade around our stocks. And if you’ll notice, what we do is average down into our highest conviction names all the way down. And we concentrate our portfolios from 58 names of the peak in February of ’21 to 33 now. So we are concentrating towards our highest conviction names and averaging down with them as the market gives us these opportunities.
Trey Lockerbie (15:09):
Speaking of your portfolios, you actually stepped down from two of them this year, the Ark 3D Printing ETF and the Ark Israel Innovative Tech ETF, both have been down as well. But I’m curious if the under performance has led to increased pressure on you to develop a succession plan.
Cathie Wood (15:30):
Well, it hasn’t just been performance, it’s been good business sense. And so, once we were in charge of our own destiny after we bought out our partners’ minority interest, we started putting in place the succession plan for me and for Brett Winton who was our director of research and now is our chief futurist. We have three directors of research. And so, I have brought on two associate portfolio managers, one who had come from due diligence at Merrill Lynch and has been with us for a while, wanted to get on the investment side and incredibly smart, Dan White. And then the other who came out of our research team, Nick Grous, he’s very focused on Next Generation Internet. So we have been using this period actually to go on the offense. Sure, the succession plan, but now, we have openings for five associate analysts, so we can announce them here.
Cathie Wood (16:34):
And the requirement is domain expertise in one of our technologies, meaning that’s what they studied in school or what their first job really was all about. And the willingness to move to St. Pete for two years would be the commitment because we really want to bring this new cohort together. So a lot of people think we’ve been shrinking and cost-cutting, we have been doing the opposite. And one of the reasons we’ve been able to do it is our asset retention. I think people are shocked. Our flagship strategy still is down nearly 60% year to date. And its share count has been moving, it’s been flat to up. I actually was in Europe a little while ago and the chief investment officer of a big bank came in with his CEO and said, “Can you believe, they’re down 60% and their shares are flat to up? How does that happen?”
Cathie Wood (17:37):
And the reason it’s happening is radical transparency, we disclose our holdings at the end of every day, we disclose our trades, we give our research away, we’re out there on Twitter, we’re out there doing webinars, We are out there for our clients and we want them to understand what we’re doing, why we’re doing it, and how exciting these opportunities are. Our research is unlike any other you’ll find out there if you can find it. And when I say that, most people are not doing the research we’re doing and yet we’re giving it away. And one of the reasons we are is because we believe, well, first we want to, we believe transparency is incredibly important to the new cohorts of investors coming in, especially after ’08, ’09. But we also want them to understand how provocative these new technologies are, how transformative, and they’re not getting that from anywhere else.
Cathie Wood (18:33):
So what we have done over the last year is I think convinced people as we were on our ground war offensive with a paper out on the Nasdaq-100 and exposing that the Nasdaq-100, only 25% of it touches any of our stocks, in any of our portfolios. So we are maybe boldly, but we’re trying to make a point. We said we’re the new Nasdaq. We are the Nasdaq that I grew up with in the 80s and 90s, which was all about innovation. The new broad-based indices or the broad-based indices, I should say, they are beginning to look more like each other. They don’t want to take risks, they want to be diversified, even if it means the Nasdaq has to own energy, utilities, bricks and mortar retail, rails, that’s not the new world. We’re the new world.
Trey Lockerbie (19:30):
You mentioned the big debate that’s been going on around inflation and how you think we’ll actually be surprised with lower prints in the coming months. I’m curious, if that were to come true and we are in the bottoming process right now, would that be enough for the Fed to change its course on its policy and not only stop hiking rates but actually begin easing, or do you think rates would stay where they are for a long time?
Cathie Wood (19:54):
Depends on how much damage they’ve done already and we’re not going to know that exactly. I think we’re in a recession. Now, finally, other people are starting to talk about recession when we’ve already had two negative real GDP quarters. Third one might be positive, but if it’s because of inventories, that doesn’t count in our book and we believe that profits are going to be under significant pressure during the next six months to year and that’s going to cause all kinds of ramifications including rising unemployment and so forth. So I don’t know how much damage they’ve done. Credit default swaps are telling me they’re doing damage and we do believe that before a year is out that they will be reversing their position. Now, I think all they’ll have to do to get this market going though is change their rhetoric. I think the most disappointing result from the last board meeting was it’s unanimity.
Cathie Wood (20:52):
They say they’re data-driven and so they have unanimous support for a 75 basis point increase. Even though commodity prices are coming down, many of them are now lower than they were last year, including gold, by the way. And in fact, many I think of us are going to help people understand that the gold price peaked two years ago, in August 2020. Most people don’t know that. And held in a trading range between $1,700 and nearly $2,100 for two years, more than two years, and recently broke below that. Copper, the same thing. A year between $4 to $5 per pound and recently broke down.
Cathie Wood (21:36):
I believe that inventories there are a part of the problem. We know that China has been bulking up on inventories, especially food inventories. The food inflation seems to be the stickiest. And I think one of the issues there is China is hoarding food and there’s a lot of unhappiness, I would say, generally in China evolving. And the one thing they cannot let happen, as they’ve learned from history, they cannot let their public go hungry. So, I think inventory hoarding has happened across the board. Now prices are coming down. If you’ve hoarded inventories and you think your biggest risk is inventory profits as you sell the inventory at higher and higher profits, that’s not a big problem. If you’ve hoarded inventory and prices start falling and you have to book inventory losses, that’s a problem. You’re probably going to tie it and sell them faster than otherwise would’ve been the case.
Trey Lockerbie (22:33):
You mentioned the food inflation being the stickiness. I believe that deflation, in order for it to happen, you have to assume that the energy prices will collapse because that’s such a huge contributor. There’s this narrative floating around that it’ll take years to get the oil capacity back up to sufficient levels assuming the demand stays constant or increases. Is there another way you’re seeing oil prices come down in the near term and the energy is, how is that factoring into your deflation equation?
Cathie Wood (23:00):
Well, I do think that in the United States, we do not consider enough about what’s going on in the rest of the world. China and Europe are in a recession. Many emerging markets are being strangled by debt service because they’ve got dollar-denominated debt, the dollar is up 25% in one year. And their currencies, many of them have collapsed, they’re down more than half. So there’s a big problem out there. But even in the United States, when I saw that gasoline demand this summer, including July 4th was down to 25-year lows. Think about that. 1997 is even lower than 2020 during the depths of the coronavirus. Think about the demand destruction that has taken place and that has been caused by these higher oil prices. Think about the accelerated shift to electric vehicles. Innovation solves problems, Tesla, that is also hurting oil demand. So when you raise the price of something dramatically, expect a substitution, expect decreased demand.
Cathie Wood (24:13):
And at the same time, it looks like in the United States, we will be back next year at peak oil production, so that’s 12.7 million barrels a day. We’ll be the largest producer once again despite this administration’s focus on renewables, which we think is good, but renewables cannot satisfy all the demands out there. It’s still a very small part of the energy complex. We think it’s going to get much bigger and we do believe that creative uses of Bitcoin technology, for example, placing Bitcoin mining machines in natural gas fields so that they can take off the flaring natural gas and save us from methane emissions that are 150 times as toxic as carbon dioxide in year one. That’s a very creative solution.
Cathie Wood (25:09):
But the other creative one for Bitcoin is to be made part of utility ecosystems where utilities can now using all of the energy after their storage units are filled and pouring that excess energy into Bitcoin mining, they can now overbuild both solar and wind. This is going to accelerate that trend. So again, innovation solves problems. Even that one is interesting because a year ago, the mantra was this is terrible, Bitcoin is so environmentally dangerous. Bitcoin is helping us with the environment given this movement I just discussed.
Trey Lockerbie (25:49):
Up until recently, we’ve seen the 10-year treasury struggling to stay above 3%, and in the last month, we’ve seen it increase to 4% and it’s now hovering right below. What is this telling us? And does that make you rethink the idea of deflation in the near term?
Cathie Wood (26:05):
It’s very interesting because we were remarking saying, hey, inflation is in the double digits when it was, and the bond yield can’t get above 3% convincingly. So why did it do so in these last few weeks? I think it is for the same reason, UK bonds sold off. If a pension fund or a company or an investment manager is getting margin calls, what is the most liquid investment you have out there? It’s a government bond. When we saw all assets including bonds selling off, we said, “Okay, something’s wrong out there.” And frankly, I was happy to learn and I actually was in Europe when we learned about the UK’s LDI problem. Many people assumed, “Oh, it’s because of their tax package.” That’s ridiculous. That is ridiculous. There was maybe an emotional reaction to that tax package. We think it’s misplaced. We actually like tax cuts.
Cathie Wood (27:03):
I’m a disciple of Art Laffer, as you may know. So tax cuts are a good thing and they’ll distinguish the UK from the rest of Europe, we think. But for whatever reason, the margin calls on pension funds forced the selling of their most liquid asset. So I think yields are going to unwind here, continue unwinding. Now again, the crisis may still be upon us. As I said, these credit default swaps are telling us something and so there could be margin calls still around the world and everyone around the world, all the major institutions have a good slug of US government bonds and those probably are the most liquid bonds they have. So, that’s what I think happened.
Trey Lockerbie (27:46):
What are your thoughts on the household employment numbers we’ve seen in the last month?
Cathie Wood (27:52):
Okay. So there’s a difference between non-farm payroll employment and household employment. Non-farm payroll employment is derived from a survey of companies. Household employment is derived from a survey of households. And the latter captures many more small businesses. Non-farm payroll employment, what we believe happened, it has happened there. There are two things going on. One, I believe the corporations started hoarding labor just like they started hoarding inventories when they were losing orders. So they doubled, tripled ordered so that they could meet demand and then they overdid it. They also had so much trouble during the past two years in attracting talent to their companies that once they’ve gotten them in the door, are they let them go? No, they’re probably going to hold them until they can’t. And I think when margins come under extreme pressure, that’s when we will see unemployment going up.
Cathie Wood (28:54):
Now, on the household side, if you look at that survey, it has been essentially flat for, I believe, five months. So big divergence between the two. In the early part of five months ago, household employment actually was falling and then came back a bit in this last one, but has been basically flat over five months or so. That is telling us that small businesses are acting, they are laying people off and they will act much more quickly than large corporations, of course, because they have to, they don’t have the buffers of cash that large corporations do. And if you look at the purchasing manager’s index, the one I think we got yesterday, employment, negative, orders, negative. So at the margin, these reports are confirming that employment, there are going to be distortions out there and of course, claims have been coming down and that’s a big head scratcher. The second thing that I think is going on, I mentioned too, so this distinction between non-farm payroll and household that being small businesses and two seasonal factors.
Cathie Wood (30:03):
Now, early in my career, very early in my career, I was a bit of an expert in seasonal factors because I started in economics and learned the Census X-11 method that now I guess they’re on Census X-13, but if you look at those programs, you’ll find that whether they are seven years in terms of figuring out seasonality or 10 years long, they wait the last two years most heavily. Now, of course, the last two years were COVID, so maybe the seasonal factors were expecting great weakness in these last few months and they didn’t get that weakness. Well, that was a distortion because of COVID. Now, the government does try and adjust for these sorts of things, but I do believe there’s some residual going on here. Maybe claims weren’t going up as quickly earlier in the year and maybe they’re not coming down, maybe the truth is somewhere in between.
Trey Lockerbie (30:58):
You mentioned the different use cases for Bitcoin, and the narrative around Bitcoin is constantly changing, almost on a monthly basis it seems. And with Bitcoin’s performance suffering through the rise of inflation, the narrative has shifted away from, okay, it’s an inflation hedge to now, oh, it’s a hedge against monetary debasement. What is your most compelling narrative for Bitcoin today and what are your thoughts about the flatness of the M2 this year?
Cathie Wood (31:23):
All right. So we’ve been with Bitcoin for a long time, and in 2015, the narrative we were facing was a Ponzi scheme. So it has certainly changed, at least we’re talking about inflation and monetary debasement, which to me is the same thing. And not even gold has escaped this. This is another manifestation of the Fed being too tight and assets across the board selling off, Bitcoin has been more of a victim of the risk of technology sell-off. And maybe, I mean, if you’re talking to me, I say the bigger risk is deflation. Maybe we’re seeing a little bit of that as well, so we’re as convinced as ever that Bitcoin is the first global private digital rules-based monetary system. And it is a very big idea. We think it is the biggest idea in the crypto asset world. And I do believe, just looking at charts of Turkey, its money growth is up 84%. When the British pound was plummeting, you looked at the volume for Bitcoin and it went up nicely.
Cathie Wood (32:39):
There was this, okay, what is this? And Bitcoin is an insurance policy. We have a really good chart in our big ideas presentation, which delineates why we think Bitcoin is going to get to $1.3 million per Bitcoin by the year 2030. And we’re not making any huge assumptions about institutional demand or the percentage of the volume that takes place in the emerging markets or with high net worth individuals who are protecting themselves from outright confiscation of wealth or inflation, which is another confiscation of wealth. So we think Bitcoin is a very big idea. If anything, our confidence has gone up as we have watched Ether and the dislocations in the market that took place around DeFi and Celsius, and so forth.
Cathie Wood (33:35):
And as we’re seeing more centralization takes place in the Ethereum world, while it is sure some centralization in Bitcoin with the exchanges, but then I’ve just given you probably the biggest decentralization story, Bitcoin will ever enjoy and that’s the utility and energy ecosystems globally. So if anything, our confidence in the network security of Bitcoin has gone up here dramatically while we wonder about the centralization characteristics of Ether, especially now that has gone proof-of-stake.
Trey Lockerbie (34:09):
Well, the last time you and I saw each other, we bumped into each other XH at the Bitcoin conference in Miami and you were doing a panel with Michael Saylor of MicroStrategy who just announced actually that they’re building on the Lightning Network, probably not surprisingly to most. But when you and I spoke back in January last year, you were a little bit suspect of MicroStrategy, I think, at the time and more around the SEC and maybe how they would like the strategy they’re putting into place. I know that Ark also wouldn’t prefer MicroStrategy for the underlying Bitcoin, but as they pivot to maybe being more of a lightning technology company…
Cathie Wood (34:46):
We’re getting more interested.
Trey Lockerbie (34:47):
Yeah, to get back into consideration.
Cathie Wood (34:52):
I love what Michael Saylor has done for the Bitcoin community in terms of bringing it a lot of attention and it is unfortunate that I don’t know if he had to step down, I don’t know what happened if it was SEC driven or what have you, but I love the fact that they’re now doubling down and actually not just using their balance sheet but activating the Lightning Network in a way that could be quite productive.
Trey Lockerbie (35:18):
In lieu of MicroStrategy, you’ve been owning GBTC for a very long time, what on earth is happening with this discount and when do you see that maybe resolving itself?
Cathie Wood (35:28):
Well, it will resolve if Grayscale is granted a Bitcoin ETF, if it’s allowed to get. And that’s a nice call option embedded in GBTC right now. It’s the only security that we could have owned and at one point it was at a significant premium over 100% and now significant discount, I think, we will get a Bitcoin ETF not anytime soon, but we will. And so, we’re looking at that as a call option on that possibility. That’s what’s going on. It’s certainly through a lot of hedge funds too who assumed that it would close. It’s not going to close until the SEC is on board.
Trey Lockerbie (36:07):
Speaking of the SEC, you also sold some Coinbase due to the increasing uncertainty and counterparty risk it would seem from the SEC, how are you viewing Coinbase today?
Cathie Wood (36:18):
We have a high degree of confidence in Coinbase. We took a very small, it was 20 basis points and I think the position at the time was close to 5%, so took 20 basis points. This is the downside of our radical transparency is our trades are analyzed, which is a good thing, at least people are paying attention to what we’re doing. But it is also, we’re not trying to send a signal about Coinbase. On that day, it is true the SEC came out and said that it thought that seven of the securities on Coinbase’s platform our securities. I mean, seven of the tokens, I should have said, are securities and they’re still up there. They’re still up there. So, that is somewhat of a risk. On the same day, Shopify dropped 15%, so they were both down a lot. What we will often do just at the margin, this is not deliberately for tax efficiency, that is an outcome of it, but we have a big loss in Bitcoin.
Cathie Wood (37:21):
We take some of those losses, we move into something else that has a big loss and which didn’t just get a regulatory slap on the hand. So that’s all that was, but it was not an indication that we are losing confidence in Coinbase broadly. We think they’re doing a heavy lift, having to figure out the regulatory system, but someone’s got to do it and we’re happy that they are. We talk to them about it quite a bit and I think they’re acting with conviction and resolve and really trying to educate regulators. I don’t know how open the SEC is to listening to them, but we know that they are talking to these CFTC quite regularly. And so, their idea now is to really try and educate regulators, why in the case of tornado cash you cannot ban or regulate software code, that’s just like there’s something called free speech. So it’s been interesting and they’re fighting the battles and many people will stay away from that kind of regulatory risk, but we think they’re doing the ecosystem a favor.
Trey Lockerbie (38:37):
All right. So I want to shift gears a little bit and talk about your new project here. You’ve recently launched a venture capital fund in partnership with Titan, where investors can participate with a minimum of investment of only $500. Talk to us about the impetus of this fund and how it came about.
Cathie Wood (38:53):
Yes. It’s been very interesting over where Ark’s funds have been in business for roughly eight years now. And what is one of the most common questions I’ve gotten over those eight years, from younger investors who do not meet the asset and income thresholds to have access to Venture Funds, it is, why can’t we have access to these companies that many of which could become 10 and 100 baggers that’s what you’re looking at when you’re looking at venture capital? Now, you’re also looking at failure, but you just need a few of those 100 baggers. And with all the innovation taking place today, we certainly believe that we will have more than a few, especially given the way we’ve set it up with our existing analyst base, which is already set up to be specialized in technologies and to be generalists when it comes to sectors.
Cathie Wood (39:51):
I’ve talked to Hester Peirce at the SEC about this, if we were to define accreditation with the word knowledge, if the threshold was knowledge, our investor base would be the accredited investor base and many of the investors in Venture Funds would not be the investor base. So, we felt it was important to do something about this, and we searched around for a structure, a wrapper that would accommodate this in a way that the SEC would appreciate. The interval fund wrapper actually came about in 1993 for this reason, but it was never used because private equity has the tax advantages associated with carried interest, whereas if you want to reach unaccredited investors, you cannot charge a carry. And so, this wrapper went by the wayside as far as private equity is concerned, we are resurrecting it.
Cathie Wood (40:50):
We’re doing in this space a little bit of what we did in the ETF space. When we put an active fully transparent equities into an ETF, the industry thought we were going to fail that it just wouldn’t work. And it’s worked beautifully in the way I described earlier to you. And so, they’ve certainly done a double take when it comes to active equity ETFs. We think the interval fund where we can have daily inflows, quarterly outflows, and it’s a public private fund, meaning it’s a crossover fund, we will be able to own companies and stocks from early stage to mega cap and our other ETFs are going to be able to buy these once they go public as well. So it’s a win-win. And I think we are getting deals and relationships with venture capital participating with them, the best venture capital firms in the world, I would submit, not just because we’re a curiosity, but because we will be helping their companies, we will raise their visibility, we will be doing podcasts with them where they will be on the Titan app.
Cathie Wood (42:01):
We will be interviewing CEOs and chief technology officers to help people understand how powerful these technologies are going to be on the Titan app. And what we found already from our podcasts is it’s a talent acquisition benefit to be interviewed by Ark. So it’s a win-win on both sides. We’ve been very gratified by the welcome we’ve gotten into the venture world, especially because of what we’re doing away from carried interest, different fee structure altogether. So we’re pretty excited about it and Titan is a fantastic partner.
Trey Lockerbie (42:40):
Yeah. I was curious about the timing of it. And do you see with the recession we’re either in and coming out of or going deeper into liquidity drying up? Is this an opportunity in the timeframe sense where you’re going to be able to step in and provide some liquidity and maybe capture some upside of these companies who are maybe struggling elsewhere?
Cathie Wood (43:00):
Well, certainly we would love to provide that role, but if you look at what happened during the tech and telecom bust, the cohorts of funds that were started during that three-year period, ended up delivering some of the best venture capital returns really ever. And that’s because fear, uncertainty, and doubt and not a crowding in of capital, easier to hire talent as the public world is under great duress, so this is very experienced talent. The best time to start a company and the best time to start a venture fund, we believe, is when times are tough and expectations are more realistic if not pessimistic. And we think expectations right now for innovation broadly are pessimistic and a lot of the investing has become very careful around it. So yes, you’re right, there is some neglect taking place out there and we know the technologies we’re looking for, we know the companies we’re looking for.
Cathie Wood (44:00):
That’s I think one thing that makes us different. We have a wishlist and we can go to companies honestly and say, “We were looking for you before we knew you existed.” Like Crusoe Energy, now it’s not in our portfolio yet, but we are definitely taking a close look at it because we found it when we were doing our research around Bitcoin and energy ecosystems, and CEOs like nothing more than to see research on what they’re doing sizing the market and understanding or believing that an investment team really appreciates how transformative they’re going to be and how much they’ll benefit the world. And that’s what we’re all about.
Trey Lockerbie (44:47):
You mentioned it’s a closed-to-end fund where there are inflows daily but then quarterly outflows, and it makes sense because the types of companies you’re approaching, like you just said, these are moonshot in some cases and very long-term. Realistically, some of these might take years to pan out. Does it make you reconsider the ETF side? Meaning the underperformance of the ETFs, do you think it would’ve been better off if they were closing funds instead?
Cathie Wood (45:09):
No. For the public asset management world, we love the ETF infrastructure, which I mentioned before. It makes investing so easy for a portfolio manager handling the flows. We don’t do that, the ecosystem does. And if anything, what’s happened here is they’re developed by the end of last year, this huge arbitrage opportunity. Finally, venture funding down rounds are suggesting the capitulation toward public, but we still believe private markets have valued these companies much more correctly than public markets. And so, you say, “Well, then why wouldn’t you use a private cert?” Well, look at the arbitrage opportunity we have right now, if we’re right on where interest rates and inflation are going, the arbitrage opportunity is huge still in some cases, not all. The down rounds in venture have started. But we like having both and we like being of a service to private companies from early stage to the time they go public, they can stay in the fund, it’s never a green fund, till the time they go mega cap. As they’re moving from startup to scaling, they’ll be more appropriate for our ETFs perhaps.
Cathie Wood (46:25):
So we want to own innovation and you can’t just do that in the public world, but the public world. Given the opportunities that we see for scaling, just had mentioned this for you, we believe that today in the public or in the equity markets globally, truly disruptive innovation is valued somewhere in the $7 trillion to $8 trillion range. By 2030, we think that goes to $210 trillion. So that’s a 30-fold increase, that doesn’t seem possible. But when you look at what Tesla has done, Tesla is a microcosm of what’s going to happen. It’s one of the earliest examples of the scaling and opportunities that are going to be available out there and they need the public markets to accomplish that.
Trey Lockerbie (47:13):
With these private companies, how does the mark-to-market aspect work? Are they doing 409A’s every day, or how do we understand the NAV of the closing fund?
Cathie Wood (47:22):
Yeah. We’re going to be very conservative. If there are no liquidity events or if there are no major movements in comps in the public markets, we’re going to wait for liquidity events. The other thing that we do have going on is the emergence of secondary markets for private companies. So, we’re getting marks that way and again, we’ll be able to tell if anything very significant is happening. In the secondary markets, we’re getting to know them all and that will also inform our decision-making. But we’re going to play it conservatively because we want our investors to think about this like they would think about a venture capital fund and hold it for seven to 10 years. And so, these quarter-to-quarter marks, or in some cases in chalk quarter when there’s some very major event, shouldn’t matter that much.
Trey Lockerbie (48:20):
You mentioned Tesla and Ark have actually been taking profits on Tesla over the last year and hey, even Elon is as well, so I can’t fault you for that, but the debut of the Optimus robot at this year’s AI day feels a bit mixed because it’s got this potential to disrupt millions of jobs while also potentially boosting Tesla’s valuation. How do you feel about this project on their plate and that they build that they rolled out?
Cathie Wood (48:47):
Well, I think we’ve been thinking about this for a while because Elon Musk describes himself as a manufacturer of factories, in other words, a manufacturer of automation. And what we find very interesting between Optimus and Dojo is he really is setting up a platform upon which other companies will be able to build. Now, should Optimus be human-like? There’s a debate there, I think that Elon believes, and Brett Winton, our chief futurist, believes that that will enable backward compatibility. We’ve been doing things a certain way for so long, and so, allowing for some backward compatibility so that we can transition to the fully automated new world is perhaps not a bad thing.
Cathie Wood (49:39):
So we didn’t see anything wrong with it. I mean, this is very early days. I think this is the first time they’ve untethered the robots. So I mean, we’re in such, such early days. But watching what Elon is doing in the various factories and how much factory-to-factory productivity increases is quite phenomenal. I don’t even think he understood he was embarked on this journey until he understood, okay, clean slate, how do I start over here? So he is gotten used to, how much do I need backward compatibility, and how much do I need the clean slate and just go. So I trust his judgment on this one.
Trey Lockerbie (50:21):
You mentioned the Dojo supercomputer, which they’ve also unveiled as well, and this is really fascinating to me. It apparently achieves double the computing power using less than half the number of chips with a significantly lower energy draw in a much smaller footprint than any previous supercomputer. So, what does this do or what does it open up for Tesla and how does it potentially rival maybe quantum computing?
Cathie Wood (50:48):
I don’t think it rivals quantum computing. Quantum computing is going to change the game and that’s one reason we’ve asked Brett Winton to take on quantum computing, quantum sensing, quantum anything, we must understand how transformative that’s going to be. This is what we do. But we do think this is part of the foundation model. There are going to be very few companies with so-called foundation models that everyone is going to want to use. And it’s been very interesting to watch Tesla introduce natural language into some of these models and improve them. I’ve been a big fan of introducing genomics data into models because I believe that will improve them. I don’t know if he has tried that or if he will try it. So when you think about autonomous taxi networks, Tesla is going to be the foundation model for that. Others will build on top, we believe. And the kinds of capabilities that you just described are absolutely essential if autonomous taxi platforms are going to become a reality.
Trey Lockerbie (51:51):
We’ve seen major energy disruption this year with increasing concerns about regional power grid issues here, especially in the US. Are we possibly seeing that electric vehicles may actually have a negative impact on at least today’s power grid and the timeline of disruption is maybe no longer what we originally thought?
Cathie Wood (52:11):
Actually, we’ve studied this for a while. In early in Ark’s life, Japan decided that it could not use its electric grid for transportation because it was taking all its nuclear down and so forth, so it just wouldn’t be possible. And we think that actually stunted their evolution. With the Prius, they were halfway there, they just needed to keep going. But at that time we studied, they launched the Mare, hydrogen fuel power and everything and we said, “Nope, the infrastructure costs, they’re prohibitive.” And then we analyzed our own electric grid and because really only, I think it’s less than 15%, just closer than 10% of all charging is done during the day at these stations. Most of it takes place at night. What does that do? That really helps the utility with load balancing. Historically, during the nighttime, there hasn’t been much use for the grid. Now there’s an important use for the grid.
Cathie Wood (53:08):
So it makes utilities more economic, we think. And it is very interesting to see Japan, even Toyota in particular, they still seem to believe that the hybrid strategy is the right strategy. I don’t hear much more about the hydrogen FuelCell. So even they have moved around and they’re even bringing back nuclear as is Germany. And we think that’s another big theme brewing out there. These new modular nuclear plants, the environmentalists are even coming around to those. So we think even cleaner energy is on the way.
Trey Lockerbie (53:49):
How far off are those? Is the technology actually there for this to exist or is that still down the line?
Cathie Wood (53:51):
No, no, no. We believe it exists. The politics were breaking through now. And just to give you a sense of how long we’ve been watching this, we did our first report on nuclear, it was called Debating Climate Change, I believe it came out late 2010. And Brett went in, was I think the primary author there, and Fukushima happened the next year. So that research went up and smoked because the politics became impossible. To the point, when I would go to Germany, I was told I must not talk about that report. Now, of course, even Germany is bringing it back. There’s been a lot more I hope instead of emotion. There’s been a lot more science and technology brought into the discussion and into the solution than there was back then.
Trey Lockerbie (54:46):
Fantastic. Well, Cathie, I always love talking to you because there’s always so much to talk about and we covered some of it, but we’re going to have to have you back and cover more. So I really appreciate it. Congrats on the Venture Fund. I hope it goes well and I hope to have you back on in the near future. Thank you again.
Cathie Wood (55:02):
Can I put in one more plug?
Trey Lockerbie (55:03):
Cathie Wood (55:04):
Because we are being very prolific today on the off-end ground war. With Eaglebrook, we are launching two new cryptos SMAs. So it’s the Ark Venture separately managed accounts, it’s for advisors, so it’s for the advisor channel. So this is separate and distinct from what we’re doing with Titan, which is really more direct-to-consumer. But advisors have been trying to figure out, how can we, in a seamless and thoughtful way, introduce crypto, this new asset class to our clients in a way that they recognize. And so, we’re excited. One is a cryptocurrency SMA and one is a crypto asset SMA.
Trey Lockerbie (55:53):
And those are out or those are coming up?
Cathie Wood (55:56):
Well, we got the okay to let advisors know. They should approach Eaglebrook, which is dedicating itself to crypto in the retail space. So we got that okay, I think, last week and the actual launch will be very soon.
Trey Lockerbie (56:14):
Fantastic. Well, Cathie, thanks for coming back. I appreciate it.
Cathie Wood (56:18):
Thank you so much. Thank you. Great interview as always.
Trey Lockerbie (56:21):
All right everybody, that’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app and if you’d be so kind, please leave us a review, it really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerbie. And don’t forget to check out all of the amazing resources we’ve built for you at theinvestorspodcast.com. You can also simply Google TIP finance and as you pop right up. And with that, we’ll see you again next time.
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